HKEx chief Charles Li faces big challenges
The first part of a series on the future of the exchange looks at the fresh challenges facing the chief executive
Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia has had his contract renewed for another three years but it is too early for him to crack open the champagne to celebrate.
Li gets a 6.38 per cent pay rise for his second term, meaning he will earn HK$8 million a year. However, he is likely to face a heavier workload coping with a global market slowdown and unpopular reforms at home.
Among his challenges, he has to find ways to improve low market turnover which has dropped 27 per cent in the first nine months of this year.
The euro-zone debt crisis as well as the mainland economic slowdown has damaged investment sentiment, severely reducing income to both the HKEx and brokers.
"In his second term, Li may want to convince the Hong Kong government to consider reducing stamp duty, which will really help HKEx," said Brett McGonegal, chief executive and executive managing director of Reorient Financial Markets.
"We believe a stamp-duty reduction will result in increased volume that would have a multitude of positive effects."
Li, 51, was born in Beijing but has lived in Hong Kong for 18 years. He worked for an oil company and as a journalist before becoming a lawyer and then a banker.
He was the chairman of JP Morgan's China division before joining the exchange as its chief in October 2009.
Brokers consider Li a reformer. He has attracted more listings from international firms and made Hong Kong the world's largest market for initial public offerings in the past three years.
This year, however, the bourse may drop out of the top 10. In the first eight months, new listings raised just under HK$43 billion, down 77 per cent from the same period of last year and hit the lowest level in 10 years.
Li's biggest achievement in his first term was to extend the trading hours of the stock market from four hours to 5.5 hours a day. The market's two-hour lunch was cut to one hour from March this year.
The longer hours are an attempt to match international practices that see many markets open between six and eight hours a day, without a lunch break.
One of Li's boldest moves has been the diversification into commodities. In June, he led the HKEx in its first overseas acquisition with a £1.39 billion (HK$17.39 billion) bid for the London Metal Exchange, the world's largest metals market. The deal is awaiting regulatory approval, which is expected late next month or early December.
However, Li's reforms have attracted plenty of criticism, particularly from Hong Kong-based brokers. Hundreds of them have organised several spectacular street protests over the past two years to oppose the extension of trading hour.
"Mr Li was an investment banker and his policies only favour the international investment banks, not local brokers," said Christopher Cheung Wah-fung, the legislator representing the financial services sector. "I would like Mr Li to communicate with the local community in his second term."
Cheung said he would lobby Li and the government to extend the lunch break to 90 minutes as an hour was too short for brokers to meet customers for business discussions.
"The extension of trading hours has failed to boost turnover but rather turnover has declined," he said.
Joseph Tong Tang, executive director of Sun Hung Kai Financial, also said Li needed to seek ways to improve the operating environment for brokers as some firms were cutting commission rates too low to compete.
He also would like to see Li help local brokers enter the mainland market.
"We have seen over 30 brokerages from mainland China already establish operations in Hong Kong but on the other hand there is no securities house in Hong Kong which can successfully set up operations in the mainland," Tong said.
"Mr Li needs to think about how to help Hong Kong brokerages, at least on the regulatory front, to develop into China," he added.
On the purchase of the LME, Cheung shared many analysts' views that the price was too high, representing 180 times its profit last year.
"The expensive takeover is set to haunt HKEx shares for the short term," he said. "However, I must say that it makes sense for the HKEx to diversify its business for longer-term growth. The real challenge is for Mr Li to show its shareholders that the acquisition price is value for money.'
This may be somewhat difficult. Li has no background in commodities trading, nor do his hundreds of staff who are experts in IPOs and stock trading. The acquisition of LME will require the hiring of a team to manage the London business.
Meanwhile, weak market sentiment may make it hard for Li to finance the deal.
The bourse has announced it was issuing US$500 million in five-year convertible bonds. A Credit Suisse report expects HKEx will need to issue about US$1 billion of additional equity for the acquisition.
"However, given the current trading multiple of the stock, the dilution from such an issue is somewhat limited, and more an issue of sentiment," the Credit Suisse report said.
"The investment case for HKEx is longer-term growth as China opens up. Further expansion into commodities trading, in our view, helps cement this role and reduces the risk that the HKEx gets marginalised."